New Frontiers in Practical Risk Management

Issue N. 17- 2019 RGO New FrontiersA in Practical Risk Management 1 Argo Magazine Iason Consulting ltd is the editor and the publisher of Argo magazine. Neither editor is responsible for any consequence directly or indirectly stemming from the use of any kind of adoption of the methods, models, and ideas appearing in the contributions contained in this magazine, nor they assume any responsibility related to the appropriateness and/or truth of numbers, figures, and statements expressed by authors of those contributions. Argo magazine Year 2019 - Issue Number 17 Published in December 2019 First published in October 2013 Last published issues are available online: http://www.iasonltd.com/research Front Cover: Alberto Burri, Bianco, 1952. Copyright c 2019 Iason Consulting ltd. All rights reserved. New Frontiers in Practical Risk Management Editors: Antonio CASTAGNA (Managing Partner) Luca OLIVO (Managing Director) Executive Editor: Giulia PERFETTI Graphic Designer: Lorena CORNA Scientific Editorial Board: Gianbattista ARESI Francesco BONFANTI Michele BONOLLO Antonio CASTAGNA Massimo GUARNIERI Antonio MENEGON Luca OLIVO Giulia PERFETTI Massimiliano ZANONI Iason Consulting ltd Registered Address: 120 Baker Street London W1U 6TU United Kingdom Italian Address: Corso Europa, 15 20122 Milano Italy Contact Information: [email protected] www.iasonltd.com Iason Consulting ltd is registered trademark. Articles submission guidelines Argo welcomes the submission of articles on topical subjects related to the risk management. The articles can be indicatively, but not exhaustively, related to models and methodologies for market, credit, liquidity risk management, valuation of derivatives, asset management, trading strategies, statistical analysis of market data and technology in the financial industry. All articles should contain references to previous literature. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Argo is a single blind refereed magazine: articles are sent with author details to the Scientific Committee for peer review. The first editorial decision is rendered at the latest within 60 days after receipt of the submission. The author(s) may be requested to revise the article. The editors decide to reject or accept the submitted article. Submissions should be sent to the technical team ([email protected]). LATEX or Word are the preferred format, but PDFs are accepted if submitted with LATEX code or a Word file of the text. There is no maximum limit, but recommended length is about 4,000 words. If needed, for editing considerations, the technical team may ask the author(s) to cut the article. Copyright c 2019 Iason Consulting ltd. All rights reserved. Argo Magazine Issue n. 17 / 2019 3 New Frontiers in Practical Risk Management Table of Contents Editorial p. 6 What’s New in the Industry p. 8 Credit Risk 2020 EU-wide EBA Stress Test: A Objectives and Key Aspects of 2020 Methodological Analysis on the Methodology p. 13 Credit Risk Perspective Regulatory Changes p. 14 Comparison between 2020 and 2018 Methodology p. 18 Critical Points for Future Consideration p. 24 References p. 26 NPL Classification a Random Forest About the Author p. 28 Approach Introduction p. 29 Massimiliano Zanoni Tree-Based Clustering p. 30 Dataset Description p. 36 Development Approach p. 40 Results and Conclusions p. 49 References p. 52 Appendix p. 53 FinTech FinTechs and Challenger Banks: About the Author p. 58 Old Business, Brand New Approach Introduction p. 59 Antonio Menegon FinTech at a Glance p. 59 A New Business Model p. 62 Conclusions p. 67 References p. 69 www.iasonltd.com 4 Argo Magazine Market Risk Security Market: an Overview of About the Authors p. 71 Repo and Security Lending Introduction p. 72 Transactions Repo and Security Lending p. 72 Nicola Giancaspro and Francesco Zorzi REPO and SEC Lending during the Crisis p. 78 Structured Repo, Tri-Party Repo and the Total Return Swap p. 80 Conclusions p. 86 References p. 87 Issue n. 17 / 2019 5 New Frontiers in Practical Risk Management Dear Readers, Welcome to the N. 17 issue of Argo, the last one for this year. In anticipation of the EU-wide stress tests that will be launched in January 2020, we open the issue with “2020 EU-wide EBA Stress Test: A Methodological Analysis on the Credit Risk Perspective” an interesting analysis of the new EBA methodological guidelines valid for the 2020 stress test exercise by Milica Antonijevic and Tancredi Mollica. The new methodology covers all relevant risk areas and incorporates feedback received during the discussion with the industry in the summer of 2019. In the paper, the authors focus on the Credit Risk area, highlighting the nine main topics where differences with 2018 guideline emerge: scenario reversion, macro-economic projections, provision calculation for NPEs, securitisation exposures, PIT parameters, provision for sovereigns, LTV and im- pact on REA and IRB regulatory EL. Always remaining within the field of Credit Risk, Massimiliano Zanoni and a team of Iason colleagues analyse the classification of NPL exposure. In particular, in “NPL Classification A Random Forest Approach” the authors propose a structured statistical approach to classify NPL assets according to their potential recovery level comparing a Machine Learning technique known as Random Forest to a better-known Logit approach. Moreover, they show that the Random Forest approach seems to be as reliable and performing as the more known Logistic approach, providing a solid overall performance even with a limited set of information. In the FinTech section, you can find our latest overview on the FinTech world and challenger banks: “FinTechs and Challenger Banks: Old Business, Brand New Approach”. The new article by Antonio Menegon and Ilaria Biondo focuses on banks business models and customers. They assess whether these players are prospering more thanks to consolidated areas for traditional banks or through services that generate new revenue streams. In the last section, devoted to Market Risk, Gianmarco Dalessandro, Nicola Gian- caspro and Francesco Zorzi present an overview of the Repurchase Agreement and the Security Lending markets analyzing how these kinds of instruments behaved and which vulnerabilities appeared during the last financial and banking crisis. www.iasonltd.com 6 Editorial Finally, we would also like to remind you of our newsletter service – this is a monthly update on the most relevant topics about Risk Management. If you are interested and have not yet received our newsletter suggestion, we invite you to subscribe on our website. We would also like to take this opportunity to wish you all happy holidays. Enjoy your reading! Antonio Castagna Luca Olivo Giulia Perfetti Issue n. 17 / 2019 7 What’s New in the Industry What’s New in the Industry 2020 EU-wide Stress Test Methodology The European Banking Authority (EBA) published the final Eu-Wide methodology and draft templates for the 2020 EU-wide stress test Stress along with the key milestones of the exercise. The methodology and Test templates cover all relevant risk areas and incorporate the feedback received during the discussion with the industry in the summer of 2019. The stress test exercise will be formally launched in January 2020 and the results published by 31 July 2020. read more Source European Bank Authority Date November 2019 Guidelines on Loan Originator and Monitoring The EBA developed the Guidelines on loan origination and monitoring in response to the European Council Action Plan on tackling the high level of non-performing exposures. The European Council, in its July 2017 Action Plan, invited the EBA to “issue detailed guidelines on banks’ loan origination, monitoring and internal governance which could in particular address issues such as transparency and borrower affordability assessment”. read more Source European Bank Authority Date June 2019 German Bond Yields and Debt Supply: Is There a “Bund Premium”? Are Bunds special? This paper estimates the “Bund premium” as the difference in convenience yields between other sovereign safe assets and German government bonds adjusted for sovereign credit risk, liquidity and swap market frictions. A higher premium suggests less substitutability of sovereign bonds. We document a rise in the “Bund premium” in the post-crisis period. We show that there is a negative relationship of the premium with the relative supply of German sovereign bonds, which is more pronounced for higher maturities and when risk aversion proxied by bond market volatility is high. Going forward, we expect German government debt supply to remain scarce, with important implications for the ECB’s monetary policy strategy. read more Source International Monetary Fund Date November 2019 Issue n. 17 / 2019 9 New Frontiers in Practical Risk Management ISDA SIMM Methodology ISDA has published the ISDA SIMM™ Methodology, version 2.2. This version of SIMM includes updates based on the full recalibration and industry backtesting of the methodology. It also includes additional granularity for the FX asset class, the removal of curvature margin from equity volatility indexes and an alteration to allow for annual calibration of credit non-qualifying intra-bucket correlations. read more Source ISDA Date September 2019 Basel Committee Publishes Consultation Paper on Revisions to the Credit Valuation Adjustment Risk Framework Improvements to the capital framework to better capture CVA risk is one of the key elements of

Load more